In Geeks Ltd v Watts the Court of Appeal (CA) has ruled that a clawback provision for training-related costs was an unlawful, and therefore unenforceable, restraint of trade.

What happened in this case?

Geeks, an IT service provider, employed Mr Watts as a trainee quality assurance engineer in March 2019. He signed an employment contract, under which he would be paid £18,000, £20,000 and £22,000 in his first three years of employment respectively, and was subject to two-year restrictive covenants on departure from Geeks prohibiting his employment by certain of their clients.

The contract also gave Geeks the right to recover the “cost of any formal training course or conferences” (including the cost of fees and training materials) that he attended in the 18 months prior to departure, payable at full cost less 1/18^th for any months worked after the training. This applied to all types of departure from employment except for redundancy.

Additionally, Mr Watts signed a training agreement which calculated a “Training Cost Debt”, stated to be the financial cost of training him in his position. This was calculated based on:

• A mentor rate of £60 per hour, applying for one hour per day for 19 days per month during the first two months (£2,280) and half an hour per day in the following four months (also £2,280) and

• 100 hours of “Employment Cost” during the following five months, worth £13 per hour (£1,300).

The above was stated to be a total of £8,108 (which was “curiously” noted by the CA as being £2 less than the actual calculation). The training agreement stated that the calculation was not designed to capture the full cost to the business but was an appropriate figure.

The debt was described as being repayable by “work contribution”, requiring the employee to remain employed for 12 months after which it would be deemed repaid by 1/18^th per subsequent month of full-time employment. Alternatively, if the employee left before complete repayment via work contribution, the outstanding sum would be repayable in full (with a discount if it was paid within 10 days). The contract said that nothing in this section was intended to restrict other employment or trading opportunities and referenced the debt in several other places (including as part of explaining why remuneration increases wouldn’t be offered).

Later that year, Mr Watts requested a pay rise which was refused. He resigned in November 2019 after eight months’ employment, having obtained a comparable job elsewhere with a salary of £30,000. In September 2021, Geeks commenced proceedings against Mr Watts to recover the purported debt of £8,108.

In the County Court, it appears to have been assumed that the clawback provisions were a restraint of trade, but the Deputy District Judge found that they protected a legitimate interest and were not unreasonable.

Mr Watts appealed this decision, and Geeks sought (at the last minute) to resist on the basis that the restraint of trade doctrine was not engaged at all. However, counsel for Mr Watts successfully argued that this new point could not be pleaded so late, and the appeal must proceed on the basis that the clause was a restraint of trade. The appeal judge noted that, had they been able to consider the point, they would have felt bound by case law (Steel v Spencer Road LLP  ICR 137) to determine that “a clawback of monies pursuant to a contract following resignation, is not a restraint of trade clause”. She also noted that in two prior Employment Tribunal cases against Geeks, the relevant clauses had not been deemed restraints of trade and had been found lawful. The other points of appeal, including those relating to the reasonableness of the costs asserted, were dismissed.

What was decided?

Mr Watts appealed to the CA on the basis that the clawback provisions were a restraint of trade that did not protect any legitimate interest of Geeks, and even if they did they went further than reasonably necessary to do so. In response, Geeks again attempted to argue that the provisions did not amount to a restraint of trade at all, and instead were simply enforceable as a debt.

The CA upheld the appeal, concluding that the clauses were unlawful restraints of trade for the following reasons:

• It was arguable that Geeks should not be allowed to pursue the point regarding whether the clauses were a restraint of trade, as this point had been conceded in prior decisions, and had the point made a difference to the overall conclusion it may have been justifiable to consider a costs order. However, the CA were prepared to permit it on the basis that it was a pure point of law, it was closely connected to Mr Watts’ two grounds of appeal, and it was desirable to resolve as an important point of principle.

• The CA considered that the clause was a restraint of trade. This was a question of substance rather than form, and it was not sufficient to say that the clause did not technically prevent an employee from leaving (which could not be lawfully done in any event). The question was whether “viewed as it must be at the time of the contract being made, it will or may have the effect of hampering the employee’s ability to trade freely” – this may capture both traditional restrictive covenants (such as non-competes) and financial disincentives. The CA found that the clause was an indirect restraint that came into force after Mr Watts’ departure. Whilst Geeks argued that the unconditional nature of the repayment obligation meant that it did not penalise Mr Watts if he chose to leave, the CA concluded that the doctrine was nevertheless engaged. The CA considered that this must be the case, otherwise an extreme requirement such as one to “repay us your entire gross salary” if departing from employment within 12 months would be enforceable as a debt without enquiry into its reasonableness.

• It was established on the basis of previous CA case law that there was a legitimate interest in “maintaining a stable, trained workforce”. The CA therefore accepted that this was the case.

• The key question was therefore whether the repayment provisions went further than reasonably necessary to protect that interest, the burden of proof being on Geeks as the party seeking to invoke the restraint. The CA considered the fact that Mr Watts did not have independent legal advice and that there was an inequality of bargaining power (as is often the case in employment contracts for relatively low wages). They accepted that monthly instalments were more reasonable than requiring repayment of a lump sum, but this was not determinative. The CA noted that the level of cost, although it had not been a specific point of appeal, was highly artificial and assumed that the work done by Mr Watts in the remainder of each working day was of “effectively no value to the employer” (despite clients being billed for his services). 

• Overall, the CA concluded that the repayment provisions went further than was reasonably necessary, and were therefore unenforceable, on two grounds:

• they applied whatever the reason for his departure (save for redundancy) and irrespective of whether he would use the skills in his next job. The CA gave the example that they would be chargeable even if he were leaving to “become a carer for his grandfather who suffered from dementia”; and

• the effect of the provisions was that in the early months of employment, Mr Watts was not paid much more than the National Minimum Wage but was “reduced in retrospect to the equivalent of an unpaid intern albeit with a loan repayable over a period”.

What does this mean for employers?

This decision highlights the dangers of seeking to rely on clawback clauses in respect of the investment of time in training an employee after an employee leaves. No matter how aggrieved the employer may feel at having ‘lost’ the value of such time, this will not be enough to justify a clause that unreasonably restricts them from leaving or performing their trade freely, and the burden will be on the employer to show that the provisions only go as far as absolutely necessary. As is often the case in contractual disputes, the inequality of bargaining power that is inherent in employment contracts is likely to weigh heavily against the employer’s arguments in this respect.

Employers looking to rely on such clauses should note the following key points:

• Ensure that any clawback provisions are tied to circumstances where the employee leaves and is expected to use their new skills elsewhere. This could be drafted similarly to a non-compete clause, for instance with reference to departure for a key competitor, client or in a comparable role. If possible, allow a level of discretion to ensure that the charge will always be appropriate to the circumstances and can be adjusted if required.

• The level of costs asserted should be directly related to genuine demonstrable cost to the employer, such as the cost of an external training course, examination or time directly spent on training activities (using an accurate hourly rate), rather than being an estimate of the overall time required. Where applicable, the charge should also account for the fact that outside of these specific activities, the employee’s work is of value to the employer and should not be considered as training time.

• Remember that a clause can still be a restraint of trade even if it does not explicitly prohibit competitive activities after leaving and be prepared to justify any financial disincentives in the same way as traditional restrictions (such as non-solicitation or non-compete provisions). Any such disincentive should therefore be necessary to protect an identifiable business interest and be proportionate to that aim.

• Structure repayment to take place by monthly instalments where possible, rather than as a lump sum, but remember that this will not be determinative if the overall clause goes further than reasonably necessary.

• Ensure that if effected in full, the provisions would not lead to the employee having been paid below the National Minimum Wage for their age during the time that they were employed.

• On entering into any agreement, allow the employee sufficient time to consider the provisions, ask questions and (if possible) take legal advice.

Geeks Ltd v Joseph Henry Watts EWCA Civ 889

BDBF is a leading employment law firm based at Bank in the City of London. If you would like to discuss any issues relating to the content of this article, please contact Rose Lim (RoseLim@bdbf.co.uk), Amanda Steadman (AmandaSteadman@bdbf.co.uk) or your usual BDBF contact.